September 21, 2006
Amaranth's Collapse Met With a Shrug
If my going on about the Amaranth collapse worries you, please bear with me. It’s just that I have been writing about huge losses for a long time, but this is the first time I get to experience a really BIG loss and know its effects. There are so many contradictory views about the effect that this fall would have that I felt it was only fair to present all views to you. The frenzy of activity that surrounded the implosion of a large hedge fund in 1998 is strangely missing this time. When hedge fund Long-Term Capital Management (LTCM) imploded, a huge group of Wall Street's most powerful bankers and brokers assembled with the New York Federal Reserve governor to devise a $3.5 billion bailout plan. This was expected to prevent a bout of panic selling in world markets.
I wonder if Amaranth Advisors LLC officials are ruing the fact that the markets just shrugged their losses off and didn’t give it more than a few moments’ thought. No, I’m not being flippant about this huge loss – just wondering how it happened that J.P. Morgan & Co. and Merrill Lynch & Co. just quietly took over and started selling off Amaranth's portfolio of ill-timed natural gas futures.
So, what’s different this time around? Analysts put it down to a belief that the market can absorb this ‘minor hiccup’! One big difference is that LTCM borrowed heavily and its failure threatened the stability of banks. So a fire sale of its assets would have hit securities held by almost every fund and investor. While Amaranth engaged in a similar form of rash trading as LTCM, it borrowed less heavily. Moreover, its positions were smaller and focused mostly in natural gas futures. So, the firm's downfall hasn’t hurt the broader markets.
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